ExpertMedium1 markMultiple Choice
CPA · Question 58 · Area 4: Entity Tax Planning
A taxpayer contributes services worth $50,000 in exchange for a 20% capital interest in a partnership. The partnership has no liabilities. What is the tax consequence to the taxpayer?
A taxpayer contributes services worth $50,000 in exchange for a 20% capital interest in a partnership. The partnership has no liabilities. What is the tax consequence to the taxpayer?
Answer options:
A.
No income recognized.
B.
$50,000 Capital Gain.
C.
$50,000 Ordinary Income.
D.
Income deferred until interest is sold.
How to approach this question
1. Identify Exchange: Services for Partnership Interest.<br/>2. Type of Interest: Capital Interest (right to immediate liquidation value).<br/>3. Rule: Receipt of a capital interest for services is taxable as ordinary income (compensation) at FMV.<br/>4. Result: $50,000 Ordinary Income.
Full Answer
C.$50,000 Ordinary Income.✓ Correct
C
The receipt of a partnership capital interest for services is a taxable event. The service partner recognizes ordinary income equal to the fair market value of the interest received.
Common mistakes
Confusing capital interest (taxable) with profits interest (generally non-taxable).
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